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Securitization and Securitized Debt

Instruments in Emerging Markets

Final Report

EMERGING MARKETS COMMITTEE

OF THE

INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS

FR10/10 OCTOBER2010

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CONTENTS

Chapter Page

List of Figures 3

1 Introduction 4

2 Executive Summary 6

3 Benefits of Securitization 8

4 Lessons From The Crisis 10

4.1 Challenges 10

4.2 Key Lessons 11

5 Current Postion of Securitization Markets in Emerging Mark and

Effects of The Crisis

15

5.1 Market Characteristics and Practices 16

5.2 Disclosure and Transparency Requirements 26

5.3 Basic Framework for Key Market Participants 31

5.4 Business Conduct Obligations 33

5.5 Credit Rating Agencies 35

6 A Brief Comparison of Key Market Practices & Market Development 36

6.1 Placement Method 366.2 Trading Venue 376.3 Transparency Requirements for OTC Markets 386.4 Retention of a Portion of the Issue by the Originator 38

7 Recommendations 397.1 Recommendations on Enabling Conditions 397.2 Recommendations for Further Development of Securitization Markets 417.3 Moving Forward with these Recommendations 46

Appendix AList of Task Force Members 47

Appendix BSurvey Questionnaire 49

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List of Figures

Fig. Name Page

1 Market Size 16

2 Originators 18

3 Buy Side 19

4 Vehicles for Securitization 21

5 Placement Method 22

6 Retention of a Portion of the Issue 23

7 Trading Venues 25

8 Role of the Government in Securitization Markets 26

9 Disclosure Requirements for ABS of Public Offering 27

10 Mandatory Rating 28

11 Transparency in OTC Markets 30

12 Prudential Framework 31

13 Oversight of the Administrator 32

14 Suitability and Due Diligence Provisions 33

15 Size of SFP Markets - Pre and Post Crisis Public and Private Offerings 36

16 Size of the SFP Markets - Pre and Post Crisis 37

17 Size of Market - Pre and Post Crisis, OTC or Exchange Traded - Most

Common % Change37

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Chapter 1 Introduction

The recent financial crisis has highlighted the importance of robust regulation for thedevelopment of securitization markets.

In order to contribute to the global efforts to understanding the crisis, the Emerging Markets

Committee (EMC) of the International Organization of Securities Comissions (IOSCO)established a Task Force on the Current Financial Crisis (Task Force). This Task Force had

two mandates:

(i) Assess and identify the impact of the current financial turmoil on emerging markets,the regulatory issues posed and the responses thereto them; and

(ii) review the role of structured financial products (SFP) in the development of emergingmarkets with a focus on developing principles or best practices for securitization in

emerging market jurisdictions.

As a result of the first mandate, the EMC Task Force on the Current Financial Crisis

published a Final Report onImpact On and Responses of Emerging Markets to the FinancialCrisis1 in September 2009.

In order to carry out the second mandate the Emerging Markets Committee Advisory Board

(EMCAB) approved the constitution of a Task Force on Securitization (TFOS) on 9 June2009. The TFOS has been co-chaired by the National Banking and Securities Commission

of Mexico (CNBV) and the Securities and Exchange Board of India (SEBI).2

The TFOS alsobenefited from the technical support of the Monetary and Capital Markets Department

(MCM) of the International Monetary Fund (IMF).

The TFOS set its main aims as being:

(i) to undertake a fact-finding survey on key topics related to securitization in emergingeconomies, as well as on the impact of the financial crisis on those markets; and

(ii) to produce a report on principles and recommendations for emerging marketjurisdictions, to enable the sound development of a securitization market.

1 Impact On and Responses of Emerging Markets to the Financial Crisis, Report of the Emerging

Markets Committee of IOSCO published on 18 September 2009 available athttp://www.iosco.org/library/pubdocs/pdf/IOSCOPD307.pdf.

2 The TFOS was led by Dr. Carlos Serrano, Vice-President for Regulatory Policy of the CNBV and Dr.

K. M. Abraham, Whole Time Member of SEBI. Members of the TFOS included regulators from:

Argentina, Bangladesh, Bermuda, Brazil, Bulgaria, Chile, Chinese Taipei, Colombia, Costa Rica,

Egypt, Ghana, Hungary, Israel, Jordan, Kenya, Korea, Malawi, Malaysia, Morocco, Oman, Pakistan,

Panama, Peru, Poland, Rumania, Sri Lanka, Tanzania, Turkey and the United Arab Emirates.

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Thirty-six jurisdictions replied to the survey questionnaire prepared by the TFOS; 27

jurisdictions responded the survey, while nine replied that securitization markets have notdeveloped yet in their jurisdictions and thus did not answer to the survey. The survey

provided valuable information regarding the state of development of securitization markets,

as well as on the regulatory framework and market practices in place in emerging marketsjurisdictions. The surveys main findings have been summarized in this report and detailedinformation provided by survey participants can be obtained through the IOSCO General

Secretariat.

The surveys findings provided the starting point for the development of recommendationsby the TFOS. The TFOS looked first at enabling conditions, particularly important for

jurisdictions whose markets have not started to develop or are at an early stage. In addition,the TFOS provided recommendations for further deepening securitization markets in

emerging markets.

In developing the recommendations the TFOS took into consideration the reports producedby different international organizations in connection with the financial crisis and the lessons

emanating from it, and examined the extent to which these reports recommendations are alsoapplicable to emerging market jurisdictions.

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Chapter 2 Executive Summary

The TFOS was constituted in June 2009 to analyze the state of development and effects ofthe financial crisis on securitization markets in emerging markets jurisdictions, as well as to

provide recommendations for their sound development.

The TFOS first step in carrying out this mandate was to undertake a fact-finding survey.Thirty-six jurisdictions replied to this initial request for information with 27 responding to

the survey, while nine replied that securitization markets have not yet developed in theirjurisdictions and were thus, not in a position to participate in the survey. The survey

provided the task force with valuable information regarding the state of development ofsecuritization markets and the effects of the crisis, as well as on the regulatory framework

and market practices in place in emerging market jurisdictions.

Many of the results from the survey were anticipated. In particular, the survey showed that

securitization markets are still underdeveloped in the majority of emerging marketjurisdictions. It also showed the existence of significant information gaps in regard to thesize and market practices in securitization markets of emerging market jurisdictions. The

survey also highlighted weaknesses in the regulatory framework for securitization markets inmany emerging market jurisdictions, especially with regard to the quality of disclosure, a

comprehensive framework for key participants in the securitization process and businessconduct obligations.

However, other results were less expected. The survey showed that the regulatory

framework of a significant number of emerging market jurisdictions already address many ofthe lessons and recommendations learned from the crisis as summarized in this report.

Particularly, in 60% of the jurisdictions, retention of a portion of the issue by the originator isalready market practice. While, in 65% of the jurisdictions securitized products are mostly

placed through public offerings and in 45% of the jurisdictions they are also traded in publicvenues (exchanges) which subjects securitization markets to higher levels of disclosure and

transparency. In addition, 79% of the jurisdictions have also imposed post-tradetransparency requirements in over the counter (OTC) markets for securitized products.

Finally, a majority of the jurisdictions already include in the perimeter of regulation keyparticipants of the securitization chain that traditionally have been outside of the perimeter of

regulation, or only lightly regulated, such as credit rating agencies (CRAs) (70% of thejurisdictions) and administrators of special purpose vehicles (SPVs) (95% of the

jurisdictions).

Furthermore, the EMC did not find strong evidence to suggest that the adoption of morerigorous regulatory frameworks and market practices have stifled the growth of securitization

markets where such practices and frameworks are in place.

These findings were the starting point for the development of recommendations by theTFOS. Firstly, given the significant number of jurisdictions where securitization markets

have not yet started to develop or are at an early stage, the report encourages authorities to

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ensure that enabling conditions are in place.

These enabling conditions refer to the need for:

(i) a stable macroeconomic environment;

(ii)a clear and robust legal framework;

(iii) robust accounting principles;

(iv)a neutral tax system;

(v)and investor education.

Secondly, the report identifies key recommendations to deepen securitization markets in

emerging market jurisdictions; in particular it encourages regulators to:

(i) collect a minimum set of data on securitization markets;

(ii)enhance disclosure for both public and wholesale markets;

(iii) foster trading through public venues;

(iv)foster the development of pricing vendors which should be regulated;

(v)develop a basic framework for key market participants;

(vi)enhance business conduct obligations; and

(vii) align credit rating agencies regulation with the IOSCO Code of Conduct Fundamentals forCredit Rating Agencies3 (IOSCO Code of Conduct).

3 Code of Conduct Fundamentals for Credit Rating Agencies, Technical Committee of IOSCO publishedMay 2008 and available athttp://www.iosco.org/library/pubdocs/pdf/IOSCOPD271.pdf.

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD271.pdfhttp://www.iosco.org/library/pubdocs/pdf/IOSCOPD271.pdfhttp://www.iosco.org/library/pubdocs/pdf/IOSCOPD271.pdfhttp://www.iosco.org/library/pubdocs/pdf/IOSCOPD271.pdf

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Chapter 3 Benefits of Securitization

Prior to the financial crisis, the conventional wisdom emphasized the positive role played bysecuritization for both originators and investors, and more generally for the provision of

credit.

For an originator, securitization offers the opportunity to transfer credit risk to other entities,thereby allowing originators to free up capital. In this way, illiquid assets are transformed

into liquid ones. Furthermore, funding can be achieved at a cheaper cost, since securitizationrelies on the quality of specific assets that have been segregated, rather than on the overall

creditworthiness of the originator. Moreover, for originators with a low capital base or lowrating, securitization may be the only way to raise capital.

For an investor, securitization provides access to a wider spectrum of products, with different

durations and levels of credit quality that can satisfy different risk appetites, it can also help

to diversify portfolios. More generally, securitization can increase the availability of creditand reduce its cost, as originators free their capital, they can turn such capital around and re-deploy it into new credit.

Securitization has been a key funding source for consumer and mortgage lending in many

mature market economies. Before the financial crisis, asset backed securities (ABS) andcovered bonds provided between 20% and 60% of the funding of new residential mortgage

loans originated in the United States, Western Europe, Japan and Australia. 4 There is littleempirical research on the impact of securitization on the general economy, however, Sabry

and Okongwu demonstrate that in the US context, securitization has increased the availabilityof credit and decreased its cost.

5

The financial crisis, however, has raised questions about such positive effects.6

Indeed, as

the crisis showed, without the appropriate incentives securitization can lead to riskconcentration, and can even be the source of systemic instability. Securitization remains an

essential tool for the provision of credit, however, as the IMF highlighted in its GlobalFinancial Stability Report, without the replacement of maturing securitized products, banks

face a contraction of their funding sources, which might exacerbate already tight creditconditions.

Alternatives to securitization such as covered bonds are not an alternative for non-deposit

4 International Monetary Fund, Restarting Securitization Markets: Policy Proposals and Pitfalls, GFSR,Chapter II, April 2009. p. 78

5 Ibid p.79. Similar conclusions were reached by the National Economic Research Associates Inc

(NERA). See NERA, Study on the Impact of Securitization on Consumers, Investors, Financial

Institutions and the Capital Markets, 2009.

6 See Hyun Song Shin, Financial Intermediation and the Post-Crisis Financial System, Princeton

University, June 2009.

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taking primary lenders because they do not have the capital base to retain the loans. At thesame time, as banks continue to repair their balance sheet in the current environment, the

absence of a risk transfer mechanism can perpetuate deleveraging pressures rather thanalleviating them

7. Thus, the key now is to restart securitization markets under a robust

regulatory framework that better aligns participants incentives with the longer term

performance of the securitized assets

8

.

7 IMF, Op cit. pp. 78-79

8 On the need to restart securitization markets see also American Securitization Forum, Australian

Securitization Forum, European Securitization Forum and Securities Industry and Financial Markets

Association, Restoring Confidence in the Securitization markets, December 2008

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Chapter 4 Lessons from the crisis

Undoubtedly, flaws in the securitization business model and the regulatory framework wereat the epicenter of the crisis. Different international organizations including the Financial

Stability Board (FSB), IMF, the World Bank, the Group of Thirty as well as domesticregulatory authorities and think tanks in different jurisdictions have produced reports that

identify such flaws and have proposed recommendations to address them. The TFOS hasrelied on such reports to identify the key lessons and recommendations from the crisis vis-a-

vis securitization markets9. Furthermore a key goal of the TFOS has been to compare and

contrast market practices and regulatory frameworks in place in emerging markets against

these lessons and recommendations.

4.1. Challenges

The challenges in the securitization business model and regulatory framework have been

grouped into three areas: wrong incentives, inadequate risk management and regulatorystructure and oversight.

4.1.1. Wrong Incentives in the Securitization Value Chain

A key problem highlighted in many reports is the misalignment of incentives throughout the

securitization value chain, starting with the originators but including also other participants inthe process. In the case of the originators the originate to distribute model, along with

remuneration practices are believed to have led to a deterioration of underwriting practices,and insufficient due diligence. Short term remuneration structures might have also lead to

mortgage brokers focusing on originating securitized products without due regard to the

longer term performance of the assets. Underwriters might not have had the appropriateincentives to conduct appropriate levels of due diligence, nor servicers to prudently performtheir obligations under the servicing agreements. These developments contributed to a sharp

decline in asset quality in some securitization markets, and contributed to underminingconfidence in global markets.

4.1.2. Inadequate Risk Management Practices

Investors, including banks and institutional investors, did not have in place robust riskmanagement mechanisms to perform their own risk assessments and management of the

securitized products they acquired. Rather, in some countries, they over-relied on credit

ratings as their main - and even only - tool to determine the quality of the products they

9 Financial Stability Forum, Report of the Financial Stability Forum on Enhancing Markets and

Institutional Resilience, April 2008; Group of Thirty, Financial Reform: A Framework for Financial

Stability, January 2009; IMF, Restarting Securitization Markets: Policy Proposals and Pitfalls in

GFSR, Chapter II; April 2009; IOSCO Technical Committee, Unregulated Financial Markets and

Products, Final Report, September 2009.

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invest in. In turn, the business model of the ratings agencies exacerbated conflicts of interestthat were not adequately dealt with by the regulation.

4.1.3. Gaps Related to the Regulatory Structure and Oversight

Much of the analysis of securitization markets has noted that participants in the securitizationvalue chain either fell outside of the regulatory perimeter or were relatively lightly regulated,such as credit rating agencies.

4.2. Key Lessons

4.2.1. Improve Disclosure and Transparency

There is wide consensus on the need to improve disclosure to investors so that they have thenecessary information that would allow them to perform robust due diligence. Improvements

have been called for in regard to:

(i) initial and ongoing information about the underlying asset pool performance; as well ason the creditworthiness of any person with direct or indirect liability to the issuer; and

(ii)representations and warranties to be provided by the originator to ensure, for example,the buy back of the underlying assets under certain conditions.

As the IOSCO Technical Committee Task Force on Unregulated Financial Markets and

Products (TFUMP) highlights, such additional disclosure might have the practical effect ofrequiring originators to conduct more detailed due diligence and risk assessments as investors

may be less likely to purchase securitized products where the disclosure indicates that

inadequate due diligence, verification and risk assurance practices have been undertaken.10

Different initiatives, both at the regulatory and industry level, are seeking to implement these

goals. For the purposes of this Report it is important to highlight the work carried out byIOSCO that has resulted in the development ofDisclosure Principles for Public Offerings

and Listing of Asset-Backed Securities11

. These Principles provide guidance on the minimumcontent of the offering document to be made available to investors. In addition, IOSCO

recently approved a new mandate for its Standing Committee on Multinational Disclosureand Accounting to develop new Principles for Disclosure for On-Going Reporting for ABS.

12

At the industry level, for example, the American Securitization Forum RESTART Project

10 p. 19 Disclosure Principles for Public Offerings and Listings of Asset-Backed Securities, Report of theTechnical Committee of IOSCO published 8 April 2010 and is available at

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD318.pdf.11 Ibid.

12 IOSCO, Final Update, 35th Annual Conference, June 10, 2010

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seeks to develop core industry-wide market standards for disclosure, due diligence andquality assurance practices for residential mortgage backed securities (RMBS). It has

already produced a disclosure package to be provided by issuers prior to the sale of privatelabel RMBS and a reporting package to be provided on a monthly basis, as well as templates

for the representations and warranties to be provided by originators.

At the same time, there has been increased consideration about the need to enhancetransparency of secondary markets for structured products, to improve price formation. The

Technical Committee Standing Committee on the Regulation of Secondary Markets (TCSC2)in its recent Final Report on Transparency of Structured Finance Products

13has noted that in

many developed jurisdictions, structured products have mostly been traded in OTC marketswhich in most of these jurisdictions have not been subject to transparency requirements.

TCSC2, in its recently, recommends countries to consider the benefits of enhancing post-trade transparency of structured products and sets out a number of recommended approaches

for regulators.

4.2.2. Improve Investors

Risk Management Practices

There is also consensus on the need for banks and institutional investors to reduce theirreliance on external credit ratings, and in turn, strengthen their risk assessment and risk

management mechanisms to select their investments and manage their associated risks.

As part of the work to strengthen the regulatory capital framework, the Basel Committee forBanking Supervision (BCBS) has required banks to conduct their own due diligence on their

securitization exposures so that they do not solely rely on rating agencies. It also issuedsupplemental guidance under Pillar 2 to address flaws in risk management. The proposed

measures addressed among others: capturing the risk of off-balance sheet exposures and

securitization activities. Enhancements to Pillar 3 include strengthening of disclosurerequirements in several areas including securitization exposures in the trading book,sponsorship of off-balance sheet vehicles, re-securitization exposures and pipeline and

warehousing risk in regard to securitization.

For institutional investors, IOSCO has recently developed good practices on due diligencefor investment managers to be applied when investing in structured products

14. At the same

time, IOSCO is reviewing suitability requirements with a view to strengthening distributorsobligations in connection with the sale of structured products. In such context the definition

of sophisticated investors will also be reviewed.

13 Transparency of Structured Finance Products, Report of the Technical Committee of IOSCO, 9 July2010, available athttp://www.iosco.org/library/pubdocs/pdf/IOSCOPD326.pdf.

14 Good Practices in Relation to Investment Managers' Due Diligence When Investing in StructuredFinance Instruments, Report of the Technical Committee of IOSCO, 29 July 2009, available at

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD300.pdf.

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD326.pdfhttp://www.iosco.org/library/pubdocs/pdf/IOSCOPD326.pdfhttp://www.iosco.org/library/pubdocs/pdf/IOSCOPD326.pdfhttp://www.iosco.org/library/pubdocs/pdf/IOSCOPD300.pdfhttp://www.iosco.org/library/pubdocs/pdf/IOSCOPD300.pdfhttp://www.iosco.org/library/pubdocs/pdf/IOSCOPD300.pdfhttp://www.iosco.org/library/pubdocs/pdf/IOSCOPD326.pdf

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Finally, the FSB has constituted a working group to further review the extent to whichregulatory reliance on ratings can be mitigated.

4.2.3. Eliminate Regulatory Arbitrage in Connection with Capital Requirements

There has also been wide consensus on the need to review capital requirements to minimizeloophole gaming and incentives for regulatory arbitrage. In this regard, under the approvedBasel II enhancements, the Basel Committee on Banking Supervision (BCBS) has

strengthened the treatment for certain securitizations in Pillar 2. The BCBS has introducedhigher charges for re-securitization exposures. As a result many of the structured financial

products (SFP) prevalent before the crisis will now be substantially more expensive to holdon balance sheet in terms of regulatory capital. As indicated above, this change has been

accompanied by increased disclosure to investors.

4.2.4. Alignment of Incentives Through Retention and Compensation Practices

There has been wide recognition on the need to better align incentives of differentparticipants in the securitization chain to the longer term performance of securitized assets.

In such context, the G-20 has recommended that originators be required to retain a portion ofthe issue as a key element to align their incentives with the longer term performance of the

securitized assets. In connection with such recommendation both the IMF and TFUMP haveproposed that such retention requirements be tailored to the securitization structure, rather

than be implemented through a one size fits all requirement.15

In addition, the Financial Accounting Standards Board (FASB) has recently eliminated gainon sale for many securitizations and required consolidation of more securitized assets on the

originators balance sheet. Among other things consolidation will cause the performance of

the securitized assets to be reflected in the originators consolidated financial statementsgoing forward.

There has also been a call for similar performance-based, medium to longer term approachesto securitization fees in order to focus market participants on underwriting quality; for

example by requiring commissions received by loan brokers and loan officers to be disbursedover time and reduced if underwriting or asset quality problems emerged, or by requiring

strong representations and warranties regarding risks associated with the origination andunderwriting practices

16.

4.2.5. Review the Perimeter of Regulation

A final recommendation from the crisis has been the need for regulators to review theperimeter of regulation to determine whether specific participants or products need to be

15 See IMF, Restarting Securitization Markets,; and TFUMP.

16 See for example, US Department of the Treasury, Financial Regulator Reform: A New Foundation,

June 2009.

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brought into the jurisdiction of the securities regulator.

In this context, the G-20 has recommended that CRAs which are used for regulatorypurposes be subject to oversight, based on a registration regime compliant with the IOSCO

Code of Conduct17. The IOSCO Code of Conduct contains provisions that seeks to address:

(i) the quality and integrity of the rating process;

(ii)the independence of Credit Rating Agencies (CRAs) and the adequate management ofconflicts of interest; and

(iii) CRAs responsibilities to the issuer and the investing public.

In addition, the IOSCO Technical Committee approved two new mandates for the Technical

Committee Standing Committee on Credit Rating Agencies (TCSC6), one on management ofconflict of interests and the other on internal controls.

17 Code of Conduct Fundamentals for Credit Rating Agencies, revised May 2008.

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Chapter 5 Current Position of Securitization Markets in Emerging

Markets and the Effects of the Crisis18

A key goal of the EMC has been to explore the level of development of securitizationmarkets in emerging market jurisdictions, as well as the regulatory framework and market

practices in place. To do that, the EMC conducted a survey whose main findings aresummarized here.

Thirty six jurisdictions responded to the survey questionnaire, and 27 jurisdictions19

answered the survey questions while nine jurisdictions reported that they did not havesecuritization markets at all20, and as a result, did not answer the survey.

The regional breakdown of the responding jurisdictions is as follows: eight jurisdictions from

the Inter-American region, four from the Africa and Middle East Region, ten from Asia-

Pacific and five from the European Region. While the results of the survey might not bestatistically significant, the fact that regulators from all regions have responded includingfrom markets with various levels of development made its findings relevant for all emerging

markets jurisdictions21

.

Many of the findings of the survey has been anticipated. In particular, the survey showedthat in the majority of the emerging market jurisdictions, securitization markets are still

underdeveloped. It also showed the existence of significant information gaps in regard to thesize and market practices of securitization markets in emerging markets. The survey also

highlighted weaknesses in the regulatory framework for securitization markets in manyjurisdictions, in particular with regard to the quality of disclosure, prudential provisions and

business conduct obligations.

On the other hand, some other findings were less expected. The survey showed that theregulatory frameworks of an important number of emerging market jurisdictions already

address many of the recommendations from the crisis summarized in Chapter 2. Inparticular, in 60% of the jurisdictions, retention of a portion of the issue by the originator is

18 The description and findings included in this section are based on the answers provided by regulatory

authorities of the corresponding jurisdictions to the Questionnaire developed by the Task Force. No

independent verification was made.

19 Argentina, Bangladesh, Brazil, Bulgaria, Chile, Chinese Taipei, Colombia, Costa Rica, Dubai, Egypt,

India, Israel, Kenya, Korea, Malaysia, Morocco, Pakistan, Panama, Peru, Poland, Romania, SouthAfrica, Sri Lanka, Thailand, Turkey, United Arab Emirates (U.A.E.), and Uruguay.

20 Bermuda, Ghana, Hungary, Jordan, Malawi, Nigeria, Oman, Srpska and Tanzania.

21 Except otherwise indicated percentages are calculated based on the number of jurisdictions that

provided information for a particular question; rather than on the total number of jurisdictions that

answered the survey. For purposes of grouping: minor participation includes participation up to nine

percent, medium from 10 to 24 percent, and major, 25 percent and up.

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already a market practice. Furthermore, in 65% of the jurisdictions securitized products aremostly placed through public offerings and in 45% of the jurisdictions they are also traded in

public venues (exchanges) which subjects securitization markets to higher levels ofdisclosure and transparency. In addition, 79% of the jurisdictions have also imposed post-

trade transparency requirements in OTC markets for securitized products. Finally, a majority

of the jurisdictions have already included in the perimeter of regulation key participants ofthe securitization chain that traditionally have been outside of the perimeter of regulation oronly lightly regulated, such as CRAs (70% of the jurisdictions) and administrators of SPVs

(95% of the jurisdictions).

5.1 Market Characteristics and Practices

5.1.1 Size

The survey showed significant differences in the level of development of securitization

markets. For instance, out of 36 jurisdictions, 17% (6 out of 36) reported having markets that

either before or after the crisis exceeded USD 6,000 million in issue size. While, 26% (9 outof 36) declined to answer the survey because they did not have securitization markets at all.The remaining jurisdictions that provided data appeared to be located somewhere in the

middle: their markets had already started to develop but were not yet significant in size.

The crisis affected securitization markets in emerging market jurisdictions differently. 33%of the jurisdictions (4 out of 13) reported a decrease in the size of their markets (Argentina,

Chinese Taipei, India, and South Africa). In contrast 67% (9 out of 13) reported an increase(Brazil, Chile, Colombia, Costa Rica, Egypt, Malaysia, Morocco, Panama and Uruguay).

0

2000

4000

6000

8000

10000

12000

14000

Market Size(in millions of dollars)

P re Cr isi s Post Cr isi s

Figure1: Market Size

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5.1.2 Instruments

In the majority of the Emerging Markets in the survey - even those with relatively large

markets - the structures used and instruments issued areplain vanilla.

As will be further explained below, non bank financial institutions are important originatorsin Emerging Markets in addition to banks and mortgage companies. As a result, in addition

to prime RMBS and prime mortgage backed securities (MBS), other types of securitizationproducts are available in these markets, including prime commercial mortgage backed

securities (CMBS), credit card ABS, and auto loans ABS. Only three jurisdictions reportedthe development of more sophisticated instruments such as credit default swaps (CDS)

(Brazil, Chinese Taipei, and Turkey).

Very few jurisdictions provided information regarding how the crisis affected the availabilityof such instruments; however it is worth mentioning that the issuance of CDS decreased in

Brazil and Chinese Taipei after the crisis, while in Turkey CDS started to be originated post-crisis.

5.1.3 Originators

The survey showed that in emerging market jurisdictions non-banking institutions have had akey role in the origination of securitized assets, thus providing liquidity to other type of

assets in addition to bank loans.

Prior to the crisis, 85% of the jurisdictions (17 out of 20) reported non-banking institutions asmajor originators, while only 40% of the jurisdictions (eight out of 20) reported banks as

major originators.

The relative importance of non-banking originators vis-a-vis banks did not change after thecrisis. However, there was a slight decrease in the percentage of countries that reported non-

banking entities as major originators, compared to a slight increase for banks. In particular,78% (14 out of 18) jurisdictions reported non-banking entities as major originators, while

50% of the jurisdictions (9 out of 18) reported banks as major originators. Furthermore, insome particular jurisdictions, specific categories of originators stopped or reduced their

activity, thus affecting the relative importance of other originators.

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Pre Crisis Post Crisis

Originators

Banks

Non-Banks

Figure 2: Originators

As of 2009, the following categories of originators were present in emerging markets:

Banks have a major participation in Brazil, Chinese Taipei, India, Korea, Morocco,Peru, Poland, South Africa and U.A.E, and negligible in Colombia;

Mortgage companies or securitization companies have a major participation inColombia, Korea, Thailand, Uruguay, a medium participation in Egypt, and a minor or

negligible participation in Brazil, Colombia, and India;

Manufacturing companies have a major participation in Brazil, Korea, and Malaysia;and minor or negligible in Argentina, Colombia, Chinese Taipei, India and United ArabEmirates (U.A.E);

Leasing companies have a major participation in Egypt and the U.A.E.; and minor ornegligible in Argentina, Brazil, Chinese Taipei, Colombia and Korea;

Commercial companies have a major participation in Argentina, and medium inUruguay (construction, farming);

Utilities have a medium participation in Costa Rica; and

Other types on non bank institutions have at least a medium participation in Brazil(multi-originators), Chile, Chinese Taipei, Egypt (a governmental body), India (non

banking finance companies), Israel, Panama, Peru, and the United Arab Emirates(U.A.E).

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5.1.4 Buy Side

As in developed markets, the buy side in emerging market jurisdictions is mostly composed

of institutional investors, mainly banks, insurance companies, pension funds, and mutualfunds.

Pre-crisis, banks dominated the mix: 44% of the respondents (eight out of 18) reported thatbanks were major investors; compared to 17% (three out of 18) for pension funds and

insurance companies, and 11% (two out of 18) for mutual funds.

Post-crisis, institutional investors remain major investors in securitized products in emergingmarket jurisdictions. However in some jurisdictions some institutional investors undertook a

rebalancing of their portfolios and as a result the importance of particular categories ofinstitutional investors changed. According to the survey, the relative importance of banks

vis--vis other categories of institutional investors appear to have decreased since only 31%(five out of 16) of the jurisdictions reported banks as major originators, compared to 17%

(three out of 16) for insurance companies and pension funds, and 13% (two out of 16) formutual funds.

0%

10%

20%

30%

40%

50%

Banks Pension Funds Insurance

Companies

Mutual Funds

Buy Side

Pre Crisis Post Crisis

Figure 3: Buy Side

As of 2009, institutional investors had the following involvement in emerging markets:

Mutual funds have a major participation in Brazil and Thailand; have a mediumparticipation in Argentina, Chile, Egypt, Korea, Malaysia, Morocco, and Peru, andminor participation in Chinese Taipei, Colombia, Costa Rica and South Africa;

Pension funds have a major participation in Chile, Korea, and Peru, mediumparticipation in Argentina, Costa Rica, Malaysia, Morocco, Poland and South Africa;

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and minor or negligible in Brazil, Colombia and Egypt;

Insurance companies have a major participation in Chile, Chinese Taipei and Koreahave a medium participation in Egypt, Malaysia, Morocco and Poland; and minor or

negligible participation in Argentina, Brazil, Colombia, and South Africa; and

Banks have a major participation in Chinese Taipei, Egypt, Malaysia, South Africa, andU.A.E; medium participation in Chile, Morocco and Peru, and minor or negligibleparticipation in Argentina, Brazil, Colombia, Costa Rica, and Korea.

According to the findings of the survey other financial institutions also invest in

securitization issues. Pre-crisis 44% of the jurisdictions (8 out of 18) reported other type offinancial institutions with at least a medium participation as investors in the market. Overall

their importance did not change significantly after the crisis, since 44% of the jurisdictions (7out of 16) reported them as having at least a medium participation in the market (Chinese

Taipei, Colombia, Egypt, Morocco, Poland, South Africa and U.A.E.).

In contrast retail investors had a minor or negligible participation in securitization markets inalmost all jurisdictions in the survey pre crisis, and this situation did not change post-crisis.

Pre and post-crisis only one jurisdiction (Costa Rica) reported retail investors as majorparticipants, though offering is restricted to high net worth individuals. Other three

jurisdictions (Peru, U.A.E and Uruguay) reported that retails investors had a mediumparticipation pre-crisis, and this number decreased to two jurisdictions post crisis (U.A.E. and

Uruguay).

5.1.5 Vehicles for Securitization

As is the case in developed markets, the survey showed that different legal vehicles can beused for securitization in emerging market jurisdictions, including trust, limited partnerships,corporations, and funds. In practice, in roughly 42% of the jurisdictions that provided

information on vehicles that can be used for securitization (10 out of 24), trusts are the mostcommon vehicle for securitization, with corporations ranking second. The survey did not

provide additional information on the reasons for such preference; thus this is an issue thatthe EMC might wish to further explore. Nevertheless in some jurisdictions the different tax

treatment of some of these vehicles versus others might be a key determinant in the decisionof what vehicle to use.

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0%

10%

20%

30%

40%

50%

60%

70%

80%

Trusts Corporations Special

Corporations

Funds Limited

Partnerships

Vehicles for Securitization

Authorized Commonly Used

Figure 4: Vehicles for Securitization

The following list summarizes the vehicles that are most commonly used in emerging marketjurisdictions:

Trust: Argentina, Bangladesh, Chinese Taipei, Colombia, Costa Rica, India, Panama,Peru, and South Africa, and Uruguay;

Corporations: Brazil, Egypt, Israel, Korea, Malaysia, and Pakistan. Special corporations:Chile, and Korea;

Funds: Brazil and Poland; and

Limited partnerships: Thailand.

5.1.6 Method of Placement

The survey showed that in the majority of emerging market jurisdictions, securitization

issues have actually mostly been placed through public offerings. As will be explainedbelow this method of placement has subjected them to higher levels of disclosure. The

survey did not provide information on whether this was a result of legal requirements ormarket practice; however this is an issue that the EMC might wish to further explore.

Pre-crisis, roughly 60% of the jurisdictions (12 out of 20) reported that all or the majority of

the issues had been placed through public offering, compared to 40% who reported that all ormajority of the issues were placed through private offerings.

The relative importance of public offering vis--vis private offering did not change after the

crisis: 65% of the jurisdictions (11 out of 17) reported that all or a majority of the issues areplaced through public offerings, compared to roughly 35% for private offerings.

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Practices in jurisdictions varied after the crisis, but with no clear pattern. In 12% (2 out of17) the percantage of issues placed through public offerings decreased (Brazil, Chinese

Taipei); while in 18% (3 out of17) it increased (Korea, South Africa and Thailand).

0%

10%

20%

30%

40%

50%

60%

70%

Pre-Crisis Post-Crisis

Placement Method

Public Offerings Private Offerings

Figure 5: Placement Method

As of 2009, placement practices in Emerging Markets were as follows:

Public offering is used for all or majority of issues in Argentina, Brazil, Chile,Colombia, Costa Rica, Egypt, Morocco, Panama, South Africa, Thailand and Uruguay;and

Private offering is used for all issues or majority of issues in Chinese Taipei, India,Israel, Korea, Malaysia and Poland;

5.1.7 Credit Enhancements and Liquidity Facilities

Inclusion of credit enhancements (such as buy-back of non-performing assets) and liquidity

facilities (such as credit lines) has been a common practice in 89% of the jurisdictions (17 outof 19).

In 88% of the jurisdictions (15 out of 17) where such arrangements are a market practice,they have been commonly provided by the originators. However, in 53% of the jurisdictions

(9 out of 17) it is also common for third parties to provide such facilities through:

The originator: Credit enhancements are provided in Argentina, Bangladesh, Brazil,Chile, Chinese Taipei, Costa Rica, Egypt, India, Korea, Malaysia, Morocco, Pakistan,

Peru, Thailand and U.A.E.; and liquidity support in Egypt, India, Malaysia, Morocco,Peru, and Thailand;

The group of the originator: Credit enhancements and liquidity support are provided in

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Peru; and

Third parties: Credit enhancements are provided in Colombia, Costa Rica, Korea,Morocco, Peru, South Africa and U.A.E., and liquidity lines in Chinese Taipei,

Colombia, Costa Rica, Korea, Malaysia, and U.A.E.

These types of arrangements may have helped investors during the crisis. In this regard, 23%of the jurisdictions (3 out of 13) reported that originators in fact bought back assets of SFPs

during the crisis. Such jurisdictions are Chinese Taipei, South Africa and Thailand.

5.1.8 Retention

One of the key lessons from the crisis is the need to align the incentives of the originatorswith the long term performance of the securitized assets. As part of the measures to achieve

such goal the G-20 has recommended the imposition of retention requirements. The surveyshowed that retention is already a market practice in 60% of the jurisdictions (12 out of 20)

in the survey. The survey did not provide additional information on why such a practice hasbeen embedded in the business model of emerging market jurisdictions; however this is an

issue that the EMC might wish to further explore.

0%

10%

20%

30%

40%

50%

60%

70%

Retention Practice Mandatory Retention

Retention of a Portion of the Issue

Figure 6: Retention of a Portion of the Issue

The following jurisdictions indicated that retention has been a common practice in their

markets: Argentina, Brazil, Chile, Chinese Taipei, Colombia, India, Korea, Malaysia,Morocco, Peru, Sri Lanka and Thailand. In one more jurisdiction (Dubai) retention is a legal

requirement imposed on the originator.

5.1.9 Insurance

The use of insurance, either in the form of mortgage or bond insurance has not been a

prevalent practice in securitization markets in emerging market jurisdictions, only Egypt

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reported the use of mortgage insurance as a common practice and Pakistan the use of bondinsurance as a common practice.

5.1.10 Underwriting Practices

In 71% of the jurisdictions (10 out of 14), underwriting is done by a third party not associatedwith the originator. It needs to be further explored whether this practice has had any positiveeffect in regard to the scrutiny that the underwriter does of the issue, as well as in regard to

compliance with suitability obligations. Underwriting practices for emerging marketjurisdictions are as given below:

By a third party: Argentina, Bangladesh, Chinese Taipei, Colombia, Egypt, Korea,Pakistan, South Africa, Thailand and U.A.E.; and

By an associate of the originator: Costa Rica, Morocco, Panama and Uruguay.

5.1.11 Servicing Arrangements

As is common in many developed markets, in roughly 83% of the jurisdictions (15 out of18), servicing arrangements are commonly retained by the originator. As of 2009, servicing

arrangements in emerging market jurisdictions which responded the survey were as follows:

By the originator: Argentina, Bangladesh, Brazil, Chile, Chinese Taipei, Colombia,Costa Rica, Egypt, India, Israel, Korea, Malaysia, Morocco, Thailand, and Uruguay;

By an associate to the originator: Malaysia; and

By a third party: Pakistan, Panama, U.A.E., and Uruguay.

5.1.12 Trading Infrastructure

As is the case in developed jurisdictions, the survey showed that in the majority of EmergingMarkets, OTC markets are more commonly used to trade securitization issues; nevertheless

in a significant number of jurisdictions securitization products are commonly traded inexchanges. The survey did not provide information on whether trading on exchanges has

been the result of a legal requirement or a market practice; however this is an issue that theEMC might wish to further explore.

Prior to the crisis in 55% of the jurisdictions (11 out of 20) OTC markets were commonlyused to trade SFPs, while in 40% of the jurisdictions (8 out of 20) exchanges were alsocommonly used to trade SFPs.

The relative importance of OTC vis--vis exchanges did not change significantly after thecrisis. 58% of the jurisdictions (11 out of 19) reported OTC as commonly used, while a

slightly higher percentage of jurisdictions reported exchanges as commonly used (45% or 9out of 19).

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0%

10%

20%

30%

40%

50%

60%

70%

OTC Exchanges Alternative Platforms

Trading Venues

Pre-Crisis Post-Cr isis

Figure 7: Trading Venues

As of 2009, SFPs were traded through the use of the following venues:

OTC markets are the only venue or the most commonly venue to trade SFPs in Brazil,Chinese Taipei, India, Israel, Korea, Malaysia, Morocco, Pakistan, Poland, and

Thailand; and

Exchanges are the only venue or the most commonly used venue to trade SFPs in Chile,Colombia, Costa Rica, Egypt, Panama, Peru, U.A.E. and Uruguay. Both exchanges andOTC markets are commonly used in Argentina.

5.1.13 Information Service Providers

Certain information service providers that could have a key role in enhancing disclosure and

improving pricing are starting to enter many emerging markets, including data collectors andprice vendors. In particular, 39% of the jurisdictions (9 out of 23) reported having private

data providers in their jurisdictions, while 42% (8 out of 19) reported the existence of pricevendors. In addition, 36% of the jurisdictions (9 out of 25) reported that price vendors haveto register with the securities regulator.

The list below summarizes information services available in emerging market jurisdictions:

Jurisdictions with private data providers include Brazil, Chile, Dubai, Korea, Malaysia,Morocco, Pakistan, South Africa and U.A.E.;

Jurisdictions with price vendors: Bulgaria, Colombia, Costa Rica, Korea, Malaysia,South Africa, Thailand, and U.A.E.; and

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Jurisdictions where price vendors have to register with the securities regulator:Colombia, Costa Rica, Dubai, Korea, Malaysia, Pakistan, Thailand and U.A.E.

5.1.14 Role of the Government

The role of the Government in the securitization markets in Emerging Markets varies. In33% of the jurisdictions (4 out of 12) the government has acted as originator (Chinese Taipei,

Malaysia, Thailand and Uruguay). In another 25% of the jurisdictions (3 out of 12) it hasacted as guarantor (Egypt, Korea, and Pakistan). Finally, in 42% of the jurisdictions (5 out of

12) the Government has been an investor (Argentina, Brazil, India, Korea, and Pakistan).

0%

5%

10%

15%

20%

25%

30%

35%40%

45%

Originator Guarantor Investor

Role of the Government in

Securitization Markets

Figure 8: Role of the Government in Securitization Markets

Overall governments in emerging markets did not take extraordinary measures to support

securitization markets, which seems consistent with the fact that only in a few jurisdictionsthe markets were significantly affected by the crisis. From those large markets affected by

the crisis only Korea took direct measures, which consisted of an increase in the level ofguarantees provided by the government sponsored entities in order to provide SMEs with

more financing options during the crisis. A few other jurisdictions (Argentina, ChineseTaipei, and Colombia) strengthened disclosure requirements on SFPs issuance post-crisis.

5.2 Disclosure and Transparency Requirements

5.2.1 Disclosure Requirements

Disclosure of information is key for investors to understand the risks of the products theybuy, to price them and based on that to make an informed decision on whether to buy them,

hold them or sell them.

As in developed jurisdictions, the survey showed that the level of disclosure for SFPs inemerging markets varies depending on whether the issue would be placed through a public or

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a private offering. That different level of disclosure was based on the premise thatsophisticated investors - to whom private offerings are usually addressed - were in a position

to get any information they need through their own means.

The survey showed that in 88% of the jurisdictions (23 out of 26), public offerings of SFPs

are subject to disclosure requirements, starting with the provision of a prospectus at themoment of issue. Moreover, in the majority of the jurisdictions where such requirements isimposed, the content of the prospectus includes the topics that IOSCO has identified as best

practices.

Continuous disclosure is more of a challenge for Emerging Markets. For example, only 83%of the jurisdictions (20 out of 24) stated in the survey that they had continuous disclosure

requirements, a lower percentage than for initial disclosure. Moreover, the level ofinformation provided is still a challenge, since in many jurisdictions the information is

provided only at the pool level. Only in nine jurisdictions information is provided at both thepool and loan level. However as discussed in Chapter 4, it is important to note that ensuring

that investors receive the degree of information that is needed for analysis (both at the pooland loan level) is also a challenge for developed jurisdictions, and one of the key lessons

from the crisis.

0%

20%

40%

60%

80%

100%

Initial prospectus Up-to-date information Disclosure at both pool

and loan level

Disclosure Requirements for ABS of

Public Offering

Figure 9: Disclosure Requirements for ABS of Public Offering

The list below summarizes disclosure requirements in emerging market jurisdictions:

Jurisdictions that have required a prospectus at issuance include: Argentina, Brazil,Chile, Chinese Taipei, Colombia, Costa Rica, Dubai, Egypt, India, Israel, Kenya, Korea,Morocco, Pakistan, Panama, Peru, Poland, Romania, South Africa, Thailand, Turkey,

U.A.E. and Uruguay;

Jurisdictions that required continuous disclosure include: Argentina, Brazil, Chile,Chinese Taipei, Colombia, Dubai, Egypt, Israel, Kenya, Korea, Morocco, Pakistan,

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Panama, Peru, Romania, South Africa, Sri Lanka, Thailand, Turkey, and Uruguay; and

Information at the pool and loan level: Chile, Colombia, Egypt, Pakistan, Panama, Peru,South Africa, Thailand and Turkey.

As has been the practice in developed jurisdictions, in 67% of the jurisdictions (16 out of 24)private offerings are not subject to the same level of disclosure requirements established forpublic offerings.

Interestingly, 33% of the jurisdictions (8 out of 24) reported that they did impose the same

requirements in public and private offerings (Dubai, Egypt, India, Malaysia, Morocco,Poland, Thailand and U.A.E.). And many other jurisdictions reported that they impose some

level of disclosure requirements on private offerings, as detailed below:

At the moment of issue: Chinese Taipei, Malaysia and Romania; and

On a continuous basis: Bangladesh, Brazil, Chinese Taipei, Malaysia and Pakistan.

The survey showed that in 83% of the jurisdictions (19 out of 23) rating of securitizationissues is mandatory for issues of public offer - a characteristic that is more prevalent in

Emerging Markets than in industrialized jurisdictions. Furthermore, in 44% of thejurisdictions (8 out of 18) ratings are also mandatory for private offerings. In many

Emerging Markets, similar rating obligations are also imposed on corporate bonds.Establishing such rating requirements in Emerging Market jurisdictions has had the goal of

reducing information asymmetries between originators and investors in various debtinstruments. However, the EMC might wish to explore further whether such mandatory

rating has resulted in over-reliance of market participants on such ratings.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Public Offering Private Offering

Mandatory Rating

Figure 10: Mandatory Rating

According to the survey, the following countries have imposed mandatory rating:

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For public offers: Argentina, Bangladesh, Brazil, Chile, Chinese Taipei, Colombia,Costa Rica, Egypt, India, Kenya, Korea, Pakistan, Peru, South Africa, Sri Lanka,Thailand, Turkey, U.A.E and Uruguay, but no updates are required in Kenya, Turkey

and U.A.E.; and

For private offerings: Bangladesh, Egypt, India, Korea, Malaysia, Peru, Thailand andU.A.E.

An important challenge in regard to information disclosure and pricing of SFPs is the factthat roughly 46% of the jurisdictions (11 out of 24) still work under local Generally Accepted

Accounting Standards (GAAPs). According to the survey local GAAPs are used inArgentina, Brazil, Chinese Taipei, Colombia, Egypt, India, Korea, Morocco, Poland,

Romania and Thailand.

Use of local GAAPs raises concerns over the quality of such standards, and thus the extent to

which financial statements produced by issuers are robust. In addition, the use of localGAAPs creates a problem of comparability of information that further hinders the ability ofinvestors to compare products available in different jurisdictions.

In addition, only in 12% of the jurisdictions (3 out of 26) regulators have developed specific

guidelines for asset valuation (Bangladesh, Chinese Taipei, and South Africa).

5.2.2 Accounting for Profit and Loss

As stated earlier, another lesson from the crisis has been the importance of linking securitizer

compensation to the longer-term performance of the securitized assets. According to the

findings of the survey in 71% (12 out of 17 of the jurisdictions) gains (or losses) resultingfrom the sale of the securitized assets are accounted on an amortized basis, rather than up-front, which should lead to better alignment of compensation.

The accounting practices in regard to recognition of gains resulting from the sale of

securitized assets are given below:

Amortized: Argentina, Bangladesh, Chile, Costa Rica, Egypt, India, Morocco, Pakistan,Panama, Thailand, Turkey and U.A.E.; and

Up Front: Brazil, Chinese Taipei, Israel, Korea, and Peru.

5.2.3 Pre and Post Trade Transparency

As indicated above, in 47% of the jurisdictions, exchanges are commonly used to trade SFPs,

which subjects them to high degree of pre-and post trade transparency. In addition, 38% ofthe jurisdictions (6 out of 16) have imposed some level of pre-trade transparency, and 79%

(11 out of 14) have imposed some level of post-trade transparency for SFPs that trade OTC.These requirements, which in Emerging Markets predate the crisis, are in line with the

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lessons from the crisis regarding the need to strengthen transparency of OTC markets, and inparticular reporting requirements, as a measure to improve price formation, as well as to

know obligations of different parties.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Pre-Trade Post-Trade

Transparency in OTC Markets

Figure 11: Transparency in OTC Markets

The list below summarizes transparency requirements in Emerging Markets:

Pre-trade transparency requirements in OTC exist in: Argentina, Bangladesh, Brazil,Korea, Morocco, Poland and Israel; and

OTC Post-trade transparency requirements exist in: Argentina, Bangladesh, Brazil,

Chinese Taipei, Dubai, Korea, Malaysia, Morocco, Poland, Romania and Thailand.

5.3 Basic Framework for Key Market Participants

The existence of a basic framework that explicitly addresses different aspects related to the

structure of the SFPs, and the responsibilities of the originator and other entities involved inthe securitization process is key for the protection of investors interests as well as for

financial regulators to clearly understand the risks taken by the different financial institutionsthat participate in a securitization process. Overall the survey showed that many jurisdictions

have not developed a comprehensive framework, although many did include provisionsgoverning certain aspects as described below.

5.3.1 Independence of the Legal Vehicle

As described above, different legal structures can be used in Emerging Markets to structure a

securitization. Establishing clear provisions in the law regarding the independence of thevehicle, especially in the event of insolvency of the originator, is key to the protection of

investors. The survey showed that such provisions do exist in roughly 86% of thejurisdictions (19 out of 22). Jurisdictions where the legal and/or regulatory framework

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explicitly deal with independence are: Argentina, Bangladesh, Chinese Taipei, Colombia,Costa Rica, Dubai, Egypt, India, Korea, Malaysia, Morocco, Pakistan, Panama, Poland,

Romania, South Africa, Turkey, U.A.E., and Uruguay.

Interestingly, in 22% of the jurisdictions (5 out of 23) those independence requirements have

been complemented by restrictions on the possibility that the originators retain the servicingof the issuance (Argentina, Dubai, Kenya, Malaysia, and Morocco).

5.3.2 Obligations of the Originator

In 71% of the jurisdictions (17 out of 24) the legal and regulatory framework allowsoriginators to retain obligations in regard to the assets transferred to the Special Purpose

Vehicle (SPV), although in a few of them some limitations apply. Only 4% of thejurisdictions (1 out of 24) require the originator to retain a portion of the issue, and 30% of

the jurisdictions (7 out of 23) actually have limitations on the purchase of a portion of theissue by the originator.

0%

10%

20%

30%

40%

50%

60%

70%

80%

Authorization

to retain

obligations

Limits to

repurchase

assets

Mandatory

retention of a

portion fo the

issue

Restrictions to

purchase a

portion of the

issue

Prudential Framework

Figure 12: Prudential Framework

The obligations of originators are summarized below:

Allowed to retain obligations and/or rights in connection to assets: Argentina,Bangladesh, Chile, Colombia, Costa Rica, Dubai, India, Israel, Kenya, Korea, Morocco,

Pakistan, Peru, Poland, South Africa, Turkey, and Uruguay;

Prohibited from retaining obligations and or rights: Brazil, Chinese Taipei, Egypt,Malaysia, Panama, Romania, and Thailand;

Limits to repurchase assets in: Colombia, Dubai, India, Kenya, Korea, Malaysia,Morocco, and Turkey;

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Required to retain a portion of the issue: Dubai; and

Restrictions on purchase of issues in: Chinese Taipei, Costa Rica, Dubai, India, Kenya,Korea, and Malaysia.

5.3.3 Representations and Warranties

The inclusion of explicit representations from the originator regarding the assets that arebeing transferred and their quality is key to establish its responsibility vis--vis the investors.

The survey showed that only in 35% of the jurisdictions (8 out of 23) such representations

are required by the legal framework. Those jurisdictions are Bangladesh, Costa Rica, Dubai,India, Kenya, Morocco, South Africa and Uruguay. The task force however, noted that the

survey did not explore whether in practice such representations are made in the prospectus orrelevant documents.

5.3.4 Underwriting Provisions

Only 24% of the jurisdictions (6 out of 25) have established specific provisions governing theunderwriting of SFPs (Bangladesh, Chinese Taipei, Egypt, India, Kenya, and South Africa).

5.3.5 Oversight of the Administrator

Given the role that administrators play vis--vis investors, it is key that they be subject to

oversight by a financial regulator. The survey showed that in 95% of the jurisdictions (20out of 21) administrators are already subject to oversight by a financial regulator.

5%

45%

15%

35%

Oversight of the Administrator

No oversight

Oversight by the

securities regulator only

Oversight by other

financial regulator only

Oversight by both the

securities regulator and

other financial regulator

Figure 13: Oversight of the Administrator

According to the survey, oversight of the administrator is carried out:

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By the securities regulator only: Brazil (funds only), Chile, Egypt, Kenya, Malaysia,Morocco, Pakistan, Thailand, Turkey and Uruguay;

By other financial regulator only: Panama, Poland and South Africa; and

By both the securities regulator and other financial regulator: Argentina, Bangladesh,Chinese Taipei, Costa Rica, Dubai, Korea, and U.A.E.

5.4 Business Conduct Obligations

As indicated in Chapter 2, over-reliance on ratings exacerbated the challenges posed by the

rating process and the conflict of interest that arise from the business model of the CRAs.This underlines the importance of establishing stronger suitability requirements on entities

that sell SFPs to the public, as well as due diligence requirements on institutional investors.The survey showed this as a challenging area.

0%

20%

40%

60%

80%

100%

Suitability

Requirements

Restrictions on

Retails Investors

Due Diligence

Requirements

Prudential

Requirements

Suitability and Due Diligence

Provisions

Figure 14: Suitability and Due Diligence Provisions

5.4.1 Suitability

Only 38% of the jurisdictions (9 out of 24) reported the existence of explicit suitabilityobligations for entities involved in the process of placing SFPs. However, 24% (6 out of 25)

of the jurisdictions have established restrictions for the sale of SFPs to retail investors. Beloware the requirements in place in Emerging Markets:

Suitability obligations: Argentina, Brazil, Chinese Taipei, Costa Rica, Egypt, Korea,South Africa, Turkey, and U.A.E.; and

Restrictions for the sale of SFPs to retail investors: Brazil, Costa Rica, Korea, Morocco,Poland and Sri Lanka.

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5.4.2 Due Diligence

The survey also showed that only 26% of the jurisdictions (6 out of 23) have developed

specific due diligence requirements for institutional investors who wish to invest in SFPs.

However, 88% (15 out of 17) impose certain prudential requirements, such as maximumpercentage limits of investment in SFPs, or minimum credit rating. Below are the obligationsin place in emerging markets:

Explicit due diligence obligations: Bangladesh, Costa Rica, Israel, Korea, Malaysia, andSouth Africa;

Percentage limits: Bangladesh, Brazil, Chile, Chinese Taipei, Costa Rica, Israel, Korea,Peru, Romania, South Africa, Turkey, U.A.E., and Uruguay; and

Minimum credit rating: Bangladesh, Brazil, Chile, Chinese Taipei, Costa Rica, Egypt,

Korea, Sri Lanka, and U.A.E.

5.5 Credit Rating Agencies

As described in Chapter 2, the crisis has highlighted the need to subject credit rating agencies

- in particular those that are used for regulatory purposes - to the oversight of a financialregulator. Such oversight should be based on a registration regime that is in line with the

IOSCO Code of Conduct.

The survey showed that 70% of the jurisdictions (19 out of 27) have already establishedregistration regimes for credit rating agencies. Those jurisdictions are: Argentina,

Bangladesh, Chile, Chinese Taipei, Colombia, Costa Rica, Egypt, India, Kenya, Korea,Malaysia, Pakistan, Panama, Peru, Romania, Sri Lanka, Thailand, Turkey, and Uruguay.

However even in jurisdictions that do require registration, the framework still needs further

enhancements, in particular to align them with the IOSCO Code of Conduct as amended in2008.

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Chapter 6 A Brief Comparison of Key Market Practices and Market

Development

As summarized in Chapter 3, the survey highlighted the existence of robust market practices

in many emerging market jurisdictions which favour transparency and price formation. TheEMC sought to explore whether any relationship exists between the adoption of such more

robust practices and the level of development of the markets - measured in terms of size. Inparticular, the EMC was interested in exploring whether the adoption of a more robust

regulatory framework or market practices could stifle securitization markets.

Given data constraints the TFOS was only able to undertake a limited analysis whichconsisted of exploring the market practices adopted by the jurisdictions with the largest

securitization markets to determine whether any pattern exists and, where appropriate,contrast such information with evidence from jurisdictions with less developed markets. In

the context of this survey, the jurisdictions identified as the largest are Brazil, Chile, Chinese

Taipei, India, Malaysia and South Africa. The market practices explored are: placementmethod, trading venue, transparency requirements in OTC markets, and retention of a portionof the issue

22.

The EMC did not find strong evidence to suggest that the adoption of more robust regulatory

frameworks and market practices has negatively affected the development of securitizationmarkets in emerging markets. In fact, in each case, at least half of the jurisdictions with the

largest markets have already adopted a framework that is more rigorous.

6.1. Placement Method

The EMC did not find strong evidence to suggest that the use of public offerings hasnegatively affected market development. In fact four of the six largest markets use publicoffering as the main method of placement. Furthermore, markets that use public offerings as

the main method of placement performed better after the crisis than those that rely mostly onprivate offerings.

22 For the purposes of this section, the term larger markets will include the six jurisdictions identified

above; and the term smaller markets will encompass all the other jurisdictions that provided

information for the corresponding topics.

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Argentina

Brazil

Chile

China Taipei

Colombia

Costa Rica

Egypt

India

Malaysia

Morocco

Panama

South Africa

Uruguay

-2000

0

2000

4000

6000

8000

10000

12000

14000

-2000 0 2000 4000 6000 8000 10000 12000 14000

PostCrisis

Pre Crisis

Private offerings

Public offerings

Size of SPF Markets - Pre and Post Crisis Public and Private Offerings 1/(In millions of U.S. dollars)

1/ The y axis measures the size of SPF markets in the post crisis period in millions of U.S. dollars and the x axis measures the size of SPF markets inmillio ns of U.S. dollars before the crisis.

Figure 15: Size of SFP MarketsPre and Post Crisis Public and Private Offerings

6.2. Trading Venue

There was no clear pattern in regard to trading venues and market development. 3 out of the6 largest markets commonly used exchanges to trade securitization products. Although, it is

difficult to compare jurisdictions based on trading venue, comparisons could be made on

their relative behaviour before and after the crisis. On the whole, markets wheresecuritization issues trade on exchanges performed better after the crisis (evidenced bygrowth), while markets where trading takes place OTC saw their markets decreased in size,

with the exception of Malaysia.

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Argentina

Brazil

Chile China Taipei

Colombia

Costa Rica

Egypt

India

Malaysia

Morocco Panama

Uruguay

-2000

0

2000

4000

6000

8000

10000

12000

14000

-2000 0 2000 4000 6000 8000 10000 12000 14000

PostCrisis

Pre Crisis

Size of SPF Markets - Pre and Post Crisis Exchange Traded, OTC and Both 1/(In millions of U.S. dollars)

1/ The y axis measures the size of SPF markets in the post crisis period in millions of U.S. dollars and the x axis measures the size of SPF markets inmilli ons of U.S. dollars before the crisis.

Exchange

OTC

Both

Figure 16: Size of SFP MarketsPre and Post Crisis

The following graph illustrates the same phenomenon: markets where trading took place onexchanges did better than OTC.

-500

0

500

1000

1500

2000

2500 Size of SPF Markets - Pre and Post Crisis, Exchange, OTC and Both(In percent change 1/)

Exchange

OTC

Both

1/ The p ercent change refers to the rate of change from post crisis level and pre crisis level.

Figure 17: Size of MarketPre and Post Crisis (OTC or Exchange Traded Most Common % Change)

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6.3. Transparency Requirements for OTC Markets

A higher percentage of smaller markets have imposed this type of requirements, however atleast half of the jurisdictions with the largest markets have also imposed them.

Jurisdictions OTC requirements

Larger markets 50%

Smaller markets 80%

6.4. Retention of a Portion of the Issue by the Originator

The evidence suggests that the imposition of such practice has not negatively affected market

development. Furthermore the evidence appears to support the opposite conclusion, since ahigher percentage of larger markets has adopted such practice vis--vis the smaller markets.

Jurisdictions Retention practicesLarger markets 83%

Smaller markets 54%

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Chapter 7 Recommendations

The survey has shown that securitization markets are still at an early stage of development in

emerging market jurisdictions, although significant differences in the size of the markets canbe found. On one hand, in many jurisdictions such markets have not begun to develop while

on the other, a few markets exhibit a significant level of development in terms of size, whileconcentrated inplain vanilla instruments.

In this context, EMC found it important to divide the recommendations into two parts: the

first part, on recommendations on enabling conditions, which are critical for jurisdictionswhose markets have not yet started to develop or are at a very early stage of development,

and the second part, on recommendations to deepen and strengthen securitization markets,especially important for markets at a later stage of development.

7.1. Recommendations on Enabling Conditions

Securities markets in general and securitization markets in particular, do not exist in isolationfrom the macroeconomic environment as well as different aspects of the legal andinstitutional infrastructure of a jurisdiction. The existence of favorable macroeconomic

conditions and robust infrastructure (legal, market and otherwise) can enable faster and morerobust development of such markets. The TFOS acknowledges that many of these conditions

fall outside the scope of authority of securities regulators. Nevertheless, it is important thatsecurities regulators are aware of these enabling conditions so that they can actively

encourage the relevant authorities to implement the necessary changes for their achievement.

7.1.1. A Stable Macroeconomic Environment

A stable macro-economic environment fosters long term investment and thus is conducive tothe development of capital markets as well as longer-term products, including securitization

products. Conversely, the existence of significant fiscal deficits can have a crowding outeffect vis--vis private sector financing.

7.1.2. A Robust Legal Framework

Experience shows that some jurisdictions have been able to develop their securitizationmarkets based on their general legal framework for contracts and corporations, while others

have enacted special securitization laws. Irrespective of the approach, the legal frameworkshould provide certainty in regard to different aspects involved in securitization. The EMC

encourages securities regulators in emerging markets to review the extent to which their legalframeworks adequately address key aspects of the securitization process, including:

A robust framework for SPVs to ensure bankruptcy remoteness. Differentlegal structures can be used for securitization such as corporations, trusts andfunds. No vehicle is inherently better than the others. Furthermore a

jurisdiction can in fact allow the use of different vehicles. The key concern inthis regard is that the legal framework for each SPV explicitly and clearly

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separates the SPV and its assets from the originator and the manager,including in the event of their insolvency. As a result of such legal

segregation, creditors of the originator or the manager cannot exercise claimsagainst the assets of the SPV in the event of their insolvency. By the same

token, the legal segregation protects the assets of the originator from claims of

the SPV investors

23

.

Provisions to also protect the collection of cash flowsfrom the event of insolvency of the servicer are also desirable;

Clear and reasonable procedures for the legal transfer of assets from theoriginator to the SPV. Different legal mechanisms can be used for a transfer

of assets; thus it is important that there be clear rules or guidelines on theconditions that a transfer needs to meet to be considered a true sale. In

addition, requirements for the transfer of assets should not be excessivelycumbersome or expensive; otherwise they could significantly affect the

development of securitization markets;

Clarity in regard to the structures that can be used vis--vis investors rights.Experience shows that different structures can be used for securitization, fromsimple pass-through to more sophisticated pay-through structures that can

even lead to synthetic structures. The legal framework should not prohibitprima facie the use of sophisticated structures. However, as the crisis has

shown it is important that regulators exercise due care to ensure that suchstructures are accompanied with sufficient disclosure, including a clear

explanation of investors rights, in particular when an issue has differenttranches. Furthermore depending on their complexity, regulators might find it

necessary to limit the offering of certain structures to sophisticated investors;

Clarity in regard to assets eligible for securitization. As in the case ofstructures, the legal framework should not exclude prima facie categories ofassets from securitization. However, securities regulators should exercise due

care to ensure that investors are provided sufficient information on the assetsbeing securitized, their nature (homogeneous or heterogeneous) and its

implications, and their performance; and

Expedite procedures for the execution of collateral. In many emerging marketjurisdictions procedures for the execution of collateral are long andcumbersome; thus affecting asset recovery. This in turn can discourage

investors from investing in securitization products, thereby affecting the

development of such markets.

23 As will be explained later, an originator can retain obligations vis--vis the SPV and its investors

through the representations and warranties.

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7.1.3. A Robust Accounting Framework

The survey showed that many emerging market jurisdictions still work under local GAAPsthat are not very robust and therefore raise quality concerns. Furthermore, the use of local

GAAPs limit the comparability of the information of issuers and products located in different

jurisdictions. Thus, the EMC recommends that securities regulators in emerging marketscontinue working towards the full implementation of International Financial ReportingStandards (IFRS). As part of such a plan the EMC recommends that regulators make joint

efforts with the accounting bodies existing in their jurisdictions in order to ensure propertraining of accountants on the use of such standards.

7.1.4. A Neutral Tax System

The legal framework should strive towards taxation neutrality, so that investors decisions

are based on their own assessments of the risk-return equation. By preserving tax neutralityresource allocation between different sectors of the economy will tend to be optimized.

7.1.5. Investor Education - Financial Literacy

According to the survey retail investors do not play a major role in securitization markets in

emerging market jurisdictions. However, overtime this condition might change, at least inregard to the plain vanilla instruments. In this context, securities regulators should make a

special effort to include structured products in their education campaigns. Authorities andmarket participants alike should be responsible for promoting financial literacy.

7.1.6. A Robust Framework for the Securities Regulator

The last precondition for the development of sound securitization markets is the existence of

a robust framework that provides the securities regulator with enough powers to regulate andsupervise securitization markets, including robust enforcement authority. Such framework

should be in line with the principles for the regulator included in the IOSCO Objectives andPrinciples of Securities Regulation24.

7.2. Recommendations for Further Development of Securitization Markets

As indicated in Chapter 2 of this Report there is wide recognition of the importance of

developing securitization markets. The crisis has shown, however, that such a developmenthas to be fostered under an environment of robust regulation and sound market practices.

Chapter 3 of this Report provided a summary of key recommendations made by different

international bodies, including IOSCO and the IMF, to restart securitization markets under asound regulatory environment. Such recommendations covered:

24 IOSCO Objectives and Principles of Securities Regulation, June 2010, available at

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD323.pdf

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(i) strengthening disclosure and transparency requirements for offerings ofsecuritized products;

(ii)improving investors risk management practices;

(iii) eliminating regulatory arbitrage in connection with capital requirements;

(iv)aligning incentives through retention and compensation practices; and

(v)reviewing the perimeter of regulation, in particular in regard to credit ratingagencies.

The survey provided very useful insight in regard to the implementation of suchrecommendations in emerging market jurisdictions. As stated in Chapter 3 of this Report, a

key finding from the survey is that the regulatory framework of many emerging market

jurisdictions already addresses many of the recommendations from the crisis. Furthermore, itappears that in many jurisdictions market practices favor transparency of securitizationmarkets, as well as better alignment of the interests of the originators with the longer term

performance of the securitized assets.

However, as highlighted, there were significant gaps in the information provided byemerging market jurisdictions that prevent the EMC from making definitive conclusions. In

addition, progress is uneven. Thus, for some jurisdictions a review of their regulatoryframeworks, to ensure that they create the right incentives for alignment of interests of

different participants with longer term performance of the securitized assets, is still a work inprogress.

The following recommendations have been developed based on the findings of the survey,

with special consideration to areas where a majority of the jurisdictions exhibit importantgaps:

7.2.1 Regulators in Emerging Markets should collect a minimum set of information on

securitization markets to monitor their development and identify potential

sources of risk for financial stability or consumer protection

The survey has shown that many regulators in emerging market jurisdictions where

securitization markets have already started to develop lack key information on the size of

their markets, their characteristics and market practices. The lack of information, in turn,prevents them from forming a comprehensive view as to how their securitization markets aredeveloping, and whether significant risks to financial stability or consumer protection are

building up due to specific market characteristics or practices. Thus, the EMC recommendsregulators in Emerging Market jurisdictions to require from participants a minimum set of

information on the securitization markets to allow them to monitor their development and,when appropriate, make changes in the intensity of regulation and/or supervision. The EMC

is aware that in some jurisdictions the ability of the regulator to collect information on

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wholesale markets might be limited; thus in these jurisdictions, the perimeter of regulationshould be reviewed and expanded accordingly.

7.2.2 Regulators in Emerging Markets should strengthen disclosure requirements for

Securitized Financial Products vis-a-vis investors, both in the context of public

as well as private offerings.

The survey showed that in a significant number of emerging market jurisdictions,

securitization issues are mostly placed through public offerings. Indeed the use of thismethod of placement has provided investors with a more comprehensive system of disclosure

- although there are still gaps in particular regarding the granularity of the information sincein many jurisdictions information is only provided at the pool, not the loan level.

Nevertheless, the EMC acknowledges the need to maintain room for private offerings,provided that improvements in disclosure requirements are also made for private offerings.

As